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Mr. Chope: The Bill now contains 76 chapters, which are not numbered in numerical order. It is therefore not possible to refer to a particular chapter without specifying the part of the Bill to which it refers. Does my right hon. Friend agree that that is confusing for people who read books and are used to chapters that start at number one and go to the end? Will he explain why the committee rejected that proposal?
Mr. Lilley: I am grateful to my hon. Friend for making that point. Of course, I cannot answer on behalf of the Government. We shall have to wait for the winding-up speeches--which, I am sure, will be fairly soon--for an explanation.
Will the Minister say whether it will be possible, under the procedures under which the Bill will be considered, for us to amend the Bill to include a different numbering system? Could we improve it as many experts outside the House want by introducing that numbering system and, if so, how would that be achieved? Although I suspect that it could well involve a complex set of amendments, that process would be worth while given that the Government have failed to undertake it. Obviously, the House would want to embark on it only if it were not persuaded by the Government that there were sensible reasons for not going down that route.
Mr. Lilley: I am grateful to my right hon. Friend for that illumination of the genesis of the Bill. It is all the sadder, therefore, if the Bill was laid out in such a way that the experts outside, who will have to use it, found helpful, but subsequently remitted. I cannot understand why it is beyond the capacity of the House to insist that its legislation be numbered in a way that is convenient for the companies and tax experts outside this place endeavouring to comply with tax law.
The fourth sense of simplification is tidying up and sanding down rough edges. As I understood the Paymaster General, the measure has been introduced in that sense, which means that there can be slight changes in the incidence of taxation. Some people will pay more tax than previously and others less, but, as she said, the changes will be only minor and it is up to the House to decide what is minor and acceptable as minor in terms of the number of people affected and the change in the tax burden of any of those individuals or companies.
Finally, there is simplification in the sense of a change in the underlying tax structure to make that simpler. That, of course, will affect the incidence of taxation and it goes beyond what the Bill seeks to achieve and what the procedure under which it is being considered enables us to do. In deciding whether to give the Bill a Second Reading, we must decide whether the simplification that it incorporates, which involves the second, third and fourth senses of that word, is adequate or whether we should not bother to go down such a route because it would be more desirable to simplify either by making the Bill much briefer, terser and more succinct or, in the final sense, by changing the underlying tax structure so that it is easier for everybody to deal with.
Given that many individuals outside the House took part in the thorough consultation--the Minister paid tribute to the time and effort that outsiders have devoted to trying to complete the process of simplification--and draftsmen and people of great skill were involved in drawing up the Bill, we have to ask ourselves why, after all that effort, we have been left with such a hugely complex measure of 334 pages. The reason is twofold. The real world is complex. A lot of people assume that all the complexities in taxation result from the imagination of the House or our frequent returns to a particular subject, but, even if one wants matters to be simple, the real world is complex.
When I was Financial Secretary or slightly before--none the less, at some stage in my long and varied career at the Treasury--I said to officials, "Why can't we have a simple tax system of one tax rate, apply that to people's incomes less their expenditure and that's it? We need just a few clauses." The officials looked at me as they had obviously looked at countless generations of Financial Secretaries and Economic Secretaries who had made the same naive points and said, "Minister, how do you define income?" Of course that raises the question whether income includes gambling income, lottery income, benefit income, gifts or rebates and refunds. What moneys should be included? That simple question leads to immense complexity of definition.
I see you looking at me, Madam Deputy Speaker, as if I am about to elaborate. Of course, I am not. I merely point out that, whatever part of the tax system we try to define, contact with the real world is likely to lead to complexities. We in the House cannot avoid that, but we can add layers to the complexity of the real world by imposing further necessary or unnecessary complexities. Above all, if policy pursues several objectives, it will find itself making several distinctions. Every time we make a distinction, we come up against the complexities in the real world and add a few dozen clauses to our Bill.
Much of that accounts for the complexity of legislation in this area, which the draftsmen have done their best to smooth down, but they cannot eliminate it if they retain the underlying conflicting and varied objectives that are incorporated in legislation on capital allowances.
It is only worth going through the process that is before us and putting the Bill on the statute book, in what may be a mildly amended form after its consideration in Committee, if there is no hope of a more radical simplification of the capital allowance structure.
Even minor simplifications as are incorporated in the Bill have costs. Practitioners will find the new system easier to use in the long run, but they will have to become familiar with it first. They will begin by being familiar with the present unnecessarily complicated legislation. Costs will be incurred in going through new legislation, repulping advisory books and bringing handbooks up to date, for example, to ensure that they deal with the proposed legislation.
It is worth doing that for the comparatively minor gains in terms of the simplicity of tax law that the Bill incorporates only if it is not possible to move more radically into a simplification of the entire structure of capital allowances.
The present system, which is incorporated in the Bill, is in large measure the system as simplified by Lord Lawson of Blaby when he was Chancellor of the Exchequer. He sought through a series of reforms to introduce lower tax rates by extending the tax base by simplifying and eliminating where possible, or reducing the value of, allowances of all sorts. In his first endeavour to deal with capital allowances--
Madam Deputy Speaker (Mrs. Sylvia Heal): Order. I remind the right hon. Gentleman that the Bill's purpose is to restate the law relating to capital allowances with minor changes. It is not a vehicle to debate policy on capital allowances, except the extent to which the Bill fulfils the purpose set out in its title.
My argument is whether it is worth voting yes or no on that issue. We should vote yes only if there is not a better alternative. We must ascertain whether the structure of the present tax system allows for an alternative. Many would say that there is no possibility of a better alternative and we should vote for the Bill as it stands, but I would argue that there is scope. This is one of the few areas of the tax system where a proposal could sensibly be put forward for radical simplification, which would render the Bill unnecessary.
When the then Chancellor of the Exchequer created the present system in the 1980s, he put the tax treatment of capital allowances in line with what company accounting systems do for capital expenditures--or at least more in line than they had been initially. When he did so, it was difficult for anyone to argue against taking that course. If companies calculate their profits, which they declare in their annual reports, by subtracting depreciation, whatever it is, and an eighth of their capital expenditure on a particular asset each year from their revenues, surely it is reasonable for the tax man to calculate the profits liable to tax on the same basis. That was the argument then, and it is, in effect, the argument incorporated in the Bill.
Companies had no argument against that. They were left speechless when the Chancellor came up with the proposal, even though many of them that had previously enjoyed 100 per cent. capital allowances did not like it. Opposition was rather muted at that time to the changes which we are, in effect, enshrining again in this legislation.
However, there was an alternative answer to that rhetorical question. When companies report in their accounts to their shareholders, they try to provide a measure against which their performance in managing their assets can be judged. They spread their expenditures on their assets over the life of those assets, so that they can be judged on how well they are extracting profit from them, and so that there are no ups and downs in the reported profits, according to the years in which assets were purchased.
Taxes, however, should reflect a company's ability to pay tax. That depends how much money it has coming in, as opposed to how much money it has going out. Taxes should reflect the tax flow of the company, rather than how it reports for the purposes of assessing how efficiently it is managing its assets. When a company invests in assets, it temporarily has less money. Subsequently, when the assets generate revenues, the company has more money to pay tax, and it is reasonable to tax it accordingly.
If we were to return to a cashflow basis of assessing the taxation of companies, that would remove the need for many of the distinctions that are incorporated in, and account for, page upon page of the Bill. Yet that is how all other items of expenditure are assessed and treated for tax purposes. We do not think that there is anything anomalous about a 100 per cent. allowance--